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The Big Picture: May 31, 2017

I suspect today will be another one of those days, like yesterday, when every little dip in SPX is met with a corresponding dip in VIX, i.e. more melting up. The 5-point gain in the futures came courtesy of the rising VIX channel “breaking down” at 7:15 ET (the white arrows.) Sadly, that’s all it takes these days.

FWIW, I’ll leave yesterday’s downside targets for SPX and USDJPY in place just in case the VIX bashing lets up.

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Instead of tracking those squiggles, I’m going to take the day and make some sense of yesterday’s word salad that started out as an update on oil. In analyzing oil, I was able to solve some puzzles regarding the relationships between oil, equities, currencies, interest rates, debt and inflation that been nagging me for quite some time.

Did you know, for instance, that although interest rates have been sliced in half since 2008, we’ll spend more servicing the federal debt in 2017? At the current run rate, we’ll spend over $500 billion for the first time in history — more than Medicaid and almost as much as on Medicare or the military. Some of the projections for future growth are downright frightening.From a central banker’s perspective, it must be terrifying — particularly if you take inflation into account. Traditionally, higher inflation has been countered with higher interest rates. But, how does that pencil out when debt and interest expenses are already past the point of no return?

This quandary helps explain many of the zigs and zags in the markets over the past 10 years. I suspect it will become even more important in the year ahead as we forecast the Fed’s actions and their likely outcome on markets.